Are you trying to find a good guide that will teach investing money for beginners? Are you finding articles that sound complicated and intimidating? You’re in luck, having reached a 6-figure net worth by the age of 25, I am sharing with you what I’ve learned along the way.
Investing can be scary, at least I know it was for me when starting out. I didn’t know where to begin, and I was nervous about making mistakes. The risks felt incredibly high, and I felt more comfortable leaving my money in a savings account.
The sad truth is that by leaving money in a bank account with interest rates that are typically lower than 1%, you’ll be losing money every year because of inflation. In simple terms, every dollar in your bank account will be worth less than it was when you put it in there.
Investing is a way to grow your money at a rate typically higher than inflation, and provides a way to increase your wealth passively.
After reading through this guide, my hope is that you’ll have a better understanding of how and where you can invest your money as a beginner. That fear that you may be feeling right now about investing will be reduced.
This post is all about investing money for beginners.
Investing Money For Beginners
How to Invest
This is probably your #1 question. HOW?
In order to answer this, it’s important that you know what an investment actually is, and everything that goes into it.
What is an investment?
Simply put, an investment is putting in money (or action) for profit or some desired result. I like to think of investment in terms of health.
When you want to be healthy and strong, you INVEST time and energy by going for runs, eating healthy food, etc. You may even INVEST money by paying for a gym membership. These different inputs yield the desired result of a more healthy body.
Similarly, you can invest money into various companies, assets, or individuals with the desire to make that money grow. When that company you bought stocks in gets larger and more profitable, your stocks are worth more. When you sell those stocks, your small investment can yield a high reward.
So. Now you get the idea of what an investment is, now we can talk about how you can actually invest your hard earned money.
What are my investment options and risks?
One option is to buy stocks or bonds. Another option is to buy real estate. You can invest in a friend’s new business that you believe will take off. There are lots of ways to invest.
Each of these options carry different amounts of risk, and depending on your risk tolerance, you’ll have to decide where you want to put your money.
While each investment provides a potential to make money, there is always a chance that you could lose your money too. The more likely the stock is to fail, the more risky it is (more like a gamble). The less likely it is to fail the less risky it is.
KEEPING IN MIND THAT YOU ARE A BEGINNER, your risk tolerance is likely lower. You probably want to start out with an investment that is very likely to succeed in the long run.
I’ll go over what those investments are in more detail in the “what to invest in” category so stay tuned. This article helps a ton with understanding risks of investing.
How do I buy investments?
Ok, so focusing on the stocks and bonds investment, your first step in buying is to open a brokerage account.
This could be with Charles Schwabb, Fidelity, Merrill Lynch, Vanguard, and many more. You could also consider getting a Robinhood account if you are interested in investing in individual stocks or cryptocurrency.
Do your research to find out which of these brokerage options sound the best. Some will allow for you to open an account with them and require very little money to start. To set up an account, typically they ask for some personal information from you i.e. your full name, date of birth, address, and SSN.
Once you have an account with one of these brokerages, you are ready to buy your stocks/bonds.
There are 4 different types of investment accounts that you can open within your brokerage account. Each of these investment accounts allow you to buy stocks and hold them for a variety of lengths of time, and with different tax implications.
These include the following:
- Standard brokerage accounts
- Retirement accounts
- Investment accounts for children
- Education accounts
If you are curious to deep dive into each of these types of investment accounts, you can find more detail through this link, (click here).
After determining which type of account you want to open, you are ready to fund it. This means you decide which stocks or bonds you will buy within the account to make it grow $$$! Use this article to learn more about saving more so you can put the most towards investing.
What to Invest In
I am not a financial advisor, so I will share here some of the types of options you have and my personal, and you can decide for yourself.
- Stocks: You can buy and sell shares of publicly traded companies.
- Bonds: You can invest in debt securities issued by corporations and government entities.
- Exchange-traded funds (ETFs): A type of investment fund that is traded on stock exchanges.
- Mutual funds: A type of investment fund that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities.
- Options: Contracts that give you the right but not the obligation to buy or sell an underlying asset at a specific price.
- Cryptocurrencies: Digital currencies, such as Bitcoin, that use cryptography for security.
- Commodities: Raw materials, such as gold, silver, and oil, that are traded on markets.
Your brokerage may offer other investment options as well. It’s important to consider your investment goals, risk tolerance, and investment knowledge before making any investment decisions.
Index Funds
I want to focus in on one type of investment that are my particular favorite: index funds.
An index fund is a type of investment vehicle that strives to mimic the performance of a selected market index. For example, a fund might track the S&P 500 or the Dow Jones Industrial Average. The fund’s portfolio consists of a mixture of stocks or bonds that are representative of the chosen index. The goal is to provide investors with a broad market exposure, rather than attempting to outperform the market through individual stock selection.
Investing in index funds can provide several advantages, such as low costs, diversification, and ease of use. Because the fund’s portfolio mirrors the chosen index, it eliminates the need for active management, resulting in lower fees compared to actively managed funds. Moreover, the diverse range of securities held in the fund offers investors a form of diversification, reducing potential risk.
Index funds can be a good choice for individuals who seek a straightforward, low-cost method to participate in the stock market and gain exposure to a variety of securities.
Investing money for beginners can take time and effort, so consider your risk tolerance and goals as you decide what to invest in.
How to Prioritize
Organizing investment priorities requires making decisions about which investments to focus on first, considering your personal financial goals, level of risk tolerance, and current financial state. These are some steps you can follow to prioritize your investments:
- Define your financial objectives: Clearly identify both your short and long term financial aspirations, such as saving for a down payment on a home, retirement, or a child’s education.
- Evaluate your risk tolerance: Assess your comfort with taking on risk and how it will affect your investment decisions. For instance, you may prefer low-risk bonds if you have a low risk tolerance, or conversely, you may be willing to invest in more aggressive stocks if you have a higher risk tolerance.
- Analyze your current financial state: Take stock of your current financial standing, including your debts, income, and expenses, to determine the amount you can afford to invest realistically.
- Build a diversified portfolio: Consider investing in a mix of assets, such as stocks, bonds, and real estate, to mitigate risk and increase the chances of reaching your financial goals.
- Factor in tax considerations: Take into account the tax consequences of your investments, including the impact on your current tax bill and future retirement income.
- Rebalance your portfolio: Regularly review and adjust your portfolio to make sure it remains aligned with your financial goals and risk tolerance.
It’s crucial to keep in mind that there’s no universal method for prioritizing investments. While learning investing money for beginners, consider seeking guidance from a financial advisor or conducting research to determine the best investment strategy for your specific circumstances.
And there you have it. This is your guide to investing money for beginners. I hope you found it useful. You should be well equipped to continue your financial journey and keep learning. The best learning comes through experience, and the best time to invest is NOW! Let that compound interest work for you!